EXERCISE 4-2:

Park Company purchased 90% of the stock of

Salt Company on January 1, 2009, for $465,000,
an amount equal to $15,000 in excess of the
book value of equity acquired. This excess
payment relates to an undervaluation of Salt
Companys land. On the date of purchase, Salt
Companys retained earnings balance was
$50,000. The remainder of the stockholders
equity consists of no-par common stock. During
2013, Salt Company declared dividends in the
amount of $10,000, and reported net income of
$40,000. The retained earnings balance of Salt
Company on December 31, 2012, was $160,000.
Park Company uses the cost method to record
its investment.
Required:
Prepare in general journal form the workpaper

Computation and Allocation of Difference between Implied and Book

Value Acquired

Parent Non- Entire

ShareControllingValue
Share
Purchase price and implied value

465,000 51,667

516,667 *

Less: Book value of equity acquired:450,00050,000500,000

Difference (implied and book value)15,0001,66716,667
Allocated to undervalued land (15,000)(1,667)(16,667)
Balance

-0-

-0-

-0-

Equity acquired by the parent company

450,000
Equity acquired for the whole company
500,000
Common
stock
??????
(450,000)
RE. 1/1
(Given)
50,000

1-Investment in Salt Company

99,000
Retained Earnings 1/1 - Park Company
99,000
To establish reciprocity (.90 ( ($160,000 $50,000))

2-Dividend Income
9,000
Dividends Declared ($10000*.90)
9,000
3-Common Stock (465-15)
450,000
Retained Earnings 1/1/13
160,000
Land
16,667
Investment ($465,000 + $99,000)
564,000
NCI ($51,667 +11,000)
62,667

EXERCISE 4-3:
At the beginning of 2009, Presidio Company
purchased 95% of the common stock of Succo
Company for $494,000. On that date, Succo
Companys stockholders equity consisted of the
following:
Common stock
$300,000
Other contributed capital
100,000
Retained earnings 1/1/2009
120,000
Total
$520,000
During 2017, Succo Company reported net
income of $40,000 and distributed dividends in
the amount of $19,000. Succo Companys
retained earnings balance at the end of 2016
amounted to $160,000. Presidio Company uses
the equity method.
Required:
Prepare in general journal form the workpaper

Equity Income ($40,000)(.95)

38,000
Investment in Succo Company
38,000

Investment in Succo Company

18050
Dividends Declared ($19,000)
(.95)
18,050

The balance in the investment account at the beginning

of the year is $532,000, which is computed as:[$494,000
+ (.95 x ($160,000 $120,000))] = $532,000

Common Stock
300,000
Other Contributed Capital
100,000
Retained Earnings 1/1/17
160,000
Investment (494,000 + 38,000)
532,000
Noncontrolling Interest*

28,000

* $520,000 x .05 + (.05 x ($160,000 - $120,000)) =

28,000

In this instance, the partial and

complete equity methods result in
the same entries because the
amount paid for the acquisition of
Succo is exactly 95% of Succos
book value.
Thus, there are no asset adjustments
and no excess amortization or
depreciation to consider.
The equity income under the complete
equity method is the same as under
the partial equity method (95% of

EXERCISE 4-4: Poco Company purchased 85% of the

outstanding common stock of Serena Company on
December 31, 2009, for $310,000 cash. On that date,
Serena Companys stockholders equity consisted of the
following:
Common stock
$240,000
Other contributed capital
55,000
Retained earnings 1/1/2009
50,000
$345,000
During 2012, Serena Company distributed a dividend in
the amount of $12,000 and at year end reported a net
loss of $10,000. During the time that Poco Company has
held its investment in Serena Company, Serena
Companys retained earnings balance has decreased
$29,500 to a net balance of $20,500 after closing on
December 31, 2012. Serena Company did not declare or
distribute any dividends in 2010 or 2011. The difference
between book value and the value implied by the
purchase price relates to goodwill.
Required:
A. Assume that Poco Company uses the equity method.

Part A Workpaper entries

12/31/12 - Equity Method
Investment in Serena Company
(.85)*($12,000)
10200
Dividends declared
10200

Investment in Serena Company (.85)*($10,000

loss) 8500
Equity loss
8500

B. Assume that Poco Company

uses the cost method. Prepare in
general journal form the entries
needed in the preparation of a
consolidated
statements
workpaper onParent
December
31, 2012.
Non- Entire
ShareControlling
Value
Share
Purchase price and implied value
310,00054,706 364,706 *
Less: Book value of equity acquired:
Difference IV & BV

345,000

16,750 2,95619,706

Goodwill
Balance

293,25051,750

(16,750)(2,956)
-0-

-0-

-0-

(19,706)

Common Stock
240,000
Other Contributed Capital
Retained Earnings 1/1/12

55,000
42,500

Difference (IV&BV)
19,706
Investment in S ($310,000 $6,375*)
303,625
NCI (54706-1125)
53,581

$42,500 = $20,500 at year-end plus 2012 loss of $10,000

plus 2012 dividends of $12,000
[($50,000 - $42,500) x .85] = 6,375
[($50,000 - $42,500) x .15] = 1125
a

Goodwill 19,706
Difference (IV&BV) 19,706

The partial equity and the complete equity

methods result in the same entries because
the excess of the cost over fair value of net
assets is allocated to goodwill, a nonamortizable asset. If any of this excess is
allocated to depreciable assets or intangible
assets
with
limited
lives
(subject
to
amortization), additional expenses will be
recorded under the complete equity method.

Part B Workpaper entries 12/31/09 - Cost Method

Under Cost method, before elimination of the investment account, a
workpaper entry is made to the investment account and P
Companys beginning retained earnings to recognize Ps share of
the cumulative undistributed income or loss of S Company from the
date of acquisition to the beginning of the current year as follows:

Retained Earnings 1/1 - Poco Company 6,375

Investment in Serena Company 6,375
To establish reciprocity (.85 ( ($50,000 $42,500))

Investment in Serena Company (.85)*($12,000)

Dividends Declared - Serena Company 10,200

10,200

(In the normal position, the entry will be from cash to dividends income, but
because of the loss occurred in the year 2012. the entry will be from cash to
investment.)

Common Stock
240,000
Other Contributed Capital 55,000
Retained Earnings 1/1/12 42,500
Difference (IV&BV)
19,706
Investment ($310,000 $6,375)
303,625
NCI (54706-1125) 53,581

Goodwill
19,706
Difference (IV&BV) 19,706

EXERCISE 4-5:
On January 1, 2009, Plate Company purchased a 90%
interest in the common stock of Set Company for
$650,000, an amount $20,000 in excess of the book value
of equity acquired. The excess relates to the
understatement of Set Companys land holdings.
Excerpts from the consolidated retained earnings section
of the consolidated statements workpaper for the year
ended December 31, 2009, follow:
Set Company
Consolidated Balances
1/1/09 retained earnings
190,000
880,000
Net income from above
132,000
420,000
Dividends declared
(50,000)
(88,000)
12/31/09 retained earnings
272,000
1,212,000
Set Companys stockholders equity is composed of

A. Workpaper Entries:

Cost of investment
$ 650,000
Less: excess cost allocated to land
20,000
Book value acquired (90%)
$ 630,000

Total stockholders equity ($630,000/.90)

700,000
Less: Retained earnings 1/1/09
190,000
Computation and Allocation of Difference between Implied and Book
Common
stock 1/1/09
$ 510,000
Value Acquired

Parent Non- Entire

ShareControlling
Value
Share
Purchase price and implied value
$650,000 72,222
*
Less: Book value of equity acquired:
630,000
70,000
Difference (IV&BV):
20,000 2,222
22,222
Goodwill
(20,000)
(22,222)
Balance
-0-0-0-

722,222
700,000
(2,222)

Part A: Eliminating entries cost method

Dividend Income (.90)($50,000) 45,000
Dividends Declared - Set Company
45,000

Common Stock ($700,000 $190,000)

510,000
Retained Earnings 1/1/09
190,000
Difference (IB&BV)
22,222
Investment in Salt Company
650,000
Noncontrolling Interest
72,222

Land
22,222
Difference (IV&BV)
22,222

B. Prepare the eliminating entries required for the

preparation of a consolidated statements workpaper on
December 31, 2009, assuming the use of the equity
method.
Equity Income
118800
Investment (.90)($132,000)

118800

Investment
45,000
dividends declared (.90)($50,000)
45,000

Common Stock - Set Company

510,000
Retained Earnings 1/1/06 - Set Company 190,000
Difference (IV&BV)
22,222
Investment in Salt Company
650,000

Land
Difference (IV&BV)

22,222
22,222

C. Determine the total noncontrolling interest

that will be reported on the consolidated
balance sheet on December 31, 2009. How does
the noncontrolling interest differ between the
cost method and the equity method?
1- $72,222 + (.1 ( $132,000) - (.1 ( $50,000) =
80,422

2- The noncontrolling interest will be the same

regardless of the method used to account for
the investment on Plate Companys books.

EXERCISE 4-8 :
On May 1, 2010, Peters Company purchased 80% of the common
stock of Smith Company for $50,000. Additional data concerning
these two companies for the years 2010 and 2011 are:
2010
2011
Peters
Smith
Peters
Smith
Common stock
$100,000 $25,000
$100,000
$25,000
Other contributed capital
40,000
10,000
40,000
10,000
Retained earnings, 1/1
80,000
10,000
129,000
53,000
Net income (loss)
64,000
45,000
37,500
(5,000)
Cash dividends (11/30)
15,000
2,000
5,000
0
Any difference between book value and the value implied by the
purchase price relates to Smith Companys land. Peters Company
uses the cost method to record its investment.
Required:
A. Prepare the workpaper entries that would be made on a

Part A: Workpaper Entries

2010
Dividend Income (.80 ( $2,000) 1,600
Dividends Declared - Smith Company
1,600
Common Stock Smith
25,000
Other Contributed Capital Smith
10,000
Retained Earnings 1/1/10 - Smith
10,000
Difference between Implied and Book Value
2,500
Subsidiary Income Purchased *
15,000
Investment in Smith Company
50,000

Computation and Allocation of Difference between Implied and Book

Value Acquired
Parent Non- Entire
ShareControlling
Value
Share
Purchase price and implied value
50,00012,500
62,500 *
Less: Book value of equity acquired:
Equity
36,000 9,000 45,000
Subsidiary Income purchased**12,0003,000
15,000
Total book value
48,00012,00060,000
Difference (IV&BV)
2,000
500 2,500
Goodwill
(2,000) (500) (2,500)
Balance
-0-0-0-

*$50,000/.80
**Subsidiary Income Purchased (4/12* $45,000)
= 15,000

2011
Estimated Retained Earnings of Smith on date of
acquisition**
Retained earnings, 1/1/2010
$ 10,000
Smith earnings to 1/5/2010 = (4/12)($45,000 from net
income)
15,000
Retained earnings, 1/5/2010
$ 25,000

Investment in Smith
22,400
Retained Earnings 1/1 Peters
22,400
To establish reciprocity (.80 ( ($53,000
$25,000**)
Common Stock - Smith
25,000
Other Contributed Capital - Smith
Retained Earnings 1/1/11 Smith
Land
2,500

10,000
53,000

EXERCISE 4-9:
Using the data presented in Exercise 4-8,
prepare workpaper elimination entries for
2010 assuming use of the partial-year
reporting alternative.

Exercise 4-9
Workpaper Entries - Cost Method
2010
Dividend Income (.80)($2,000) 1,600
Dividends Declared - Smith Company
1,600
Common Stock Smith
25,000
Other Contributed Capital Smith
10,000
Retained Earnings 5/1/07 Smith *
25,000
Difference between Implied and Book Value
2,500
Investment in Smith Company
50,000
Noncontrolling Interest
12,500

Land
2,500
Difference (IV&BV)
2,500